Online-Shopping Market in China -

Transcription

1 CBC MARKETING RESEARCH SHANGHAI OFFICE Online-Shopping Market in China - Adventurous Kingdom for Foreign SME by Lee, Hsiang-Ting December 2009

2 Table of Contents I Table of Contents Table of Contents... I List of Figures... III List of Tables... IV 1. Introduction Online Shopping Market in China Macroeconomic Environment in China Internet Access Condition in China Demographic Structure of Netizens Trends in the Internet Development in China Current Development of the Chinese Online Shopping Market Online Buyer Analysis Market Participants in the Online Retailing Market and their Business Models Overview of the Online Retailing Market Major Retailers in the Online Shopping Market Key Considerations in the Choice of Online Retailers Manufacturers with Online Sales Major Operational Issues in the Chinese Online Shopping Market Multichannel Distribution and Price Competition Price Competition with Unauthorized Online Stores Logistics in the Online Shopping Market Payments in the Online Shopping Market Problems of Counterfeit Products... 51

3 Table of Contents II 5. Success Factors in the Chinese Online Shopping Market Success Factors of Online Retailers Success Factors of the Manufacturers with Online Sales Conclusion Trends in the Chinese Online Shopping Market Advice for Foreign SMEs Bibliography Contact Information... 78

4 List of Figures III List of Figures Figure 1: China s GDP and Year-On-Year GDP Growth Rates... 3 Figure 2: China s IT Market Growth Rate and GDP Growth Rate Forecast, Figure 3: Size of Netizens and Internet Penetration Rates in China... 5 Figure 4: World Internet Penetration Rates, Figure 5: Download Speeds in Major OECD Countries... 7 Figure 6: Netizens Gender Distribution... 8 Figure 7: Netizens Age Distribution... 9 Figure 8: Netizens Age Distribution in China, Korea, Taiwan, Hong Kong, and Macao Figure 9: Development of Netizens Age Structure from Figure 10: Development of Netizens Income Structure from 2000 to June Figure 11: Netizens Educational Structure Figure 12: Value of Transactions and Market Growth Rates in the Chinese Online Shopping Market Figure 13: Percentage of Online Retail Sales in the Total Retail Sales in the Chinese Market.. 13 Figure 14: Value of Transactions in the Chinese Online B2C and C2C Market Figure 15: Average Online Purchasing Amounts per User per Year Figure 16: Netizens and Online Customers Gender Distribution, Figure 17: Online Customers Age Distribution, Figure 18: Online Buyers Yearly Purchasing Amounts by Income, Figure 19: Value of Online Shopping Transactions by Region, Figure 20: Market Share of Online Payment Providers in China, Figure 21: Key Influencing Factors on Online Purchasing Decisions of Male Customers, Figure 22: Key Influencing Factors on Online Purchasing Decisions of Female Customers, Figure 23: Netizens Media Channels for Information of Online Shopping Websites, June Figure 24: Market Share of Online Retailers in China, Figure 25: Value of Transactions of Major Online Retailers,

5 List of Tables IV List of Tables Table 1: Ranking of Best Sold Items over Internet, Table 2: Monthly Incomes of Online Customers, June Table 3: Online Customers Income Structure by Cities, June Table 4: Online Customers Educational Level, June Table 5: Length of Prior Internet Experience among Online Customers in Different Cities Table 6: Online Customers Scale and Penetration Rates by Region, Table 7: Most Used Payments Methods by Online Customers, Table 8: Comparison of Products and Services of 360Buy, Dangdang and Amazon Table 9: Tasks for Manufacturers to Sell through Online Retailers Table 10: Advantages and Disadvantages of the Collaboration with Online Retailers Table 11: Composition of Users by Types of Online Retailers Table 12: Users Age Structure by Online Shopping Platforms, June Table 13: Online Customers Income Levels by Online Shopping Platforms, June Table 14: Types of Online Business Models Table 15: Market Positioning of Markfairwhale s Online and Offline Channels Table 16: Comparison of Market Entry Modes in the Chinese Online Shopping Mark Table 17: Advantages and Disadvantages of Three Expansion Modes over Internet Table 18: SWOT Analysis for Foreign Firms in the Chinese Online Shopping Market... 65

6 List of Abbreviations V List of Abbreviations B2C online shopping website CNNIC COD B2C online shopping websites are platforms which sell goods or services directly to final customers. Major B2C online shopping websites are Dangdang, Amazon and 360Buy. B2C online shopping customers are customers who purchased from B2C online shopping websites in the past 6 months (CNNIC, June 2008, p.6). China Internet Network Information Center (CNNIC) is the governmental network information center of China. Established in 1997, the main responsibility of CNNIC includes domain name registry, IP address and autonomous system number allocation service, catalogue database service, technical researches on Internet addressing, Internet survey and relevant information services (CNNIC 2009). Cash on delivery CRM C2C online shopping website Electronic business and online shopping Junior college Customer relationship management C2C online shopping websites are online platforms like EBay for transactions between individuals (CNNIC, June 2008, p.6). Electronic business include any purchase of goods and services via online communication, including business to business (B2B), business to consumer (B2C), consumer to consumer (C2C) and government to business (G2B) (CNNIC, June 2008, p.6). In the report, online shopping will be mainly focused on online B2C market. Junior college is usually known as higher vocational school where students attend after the graduation from senior high schools. The focus of the lectures in junior colleges is on practical skills rather than theoretical knowledge in university education.

7 List of Abbreviations VI Kbps Mbit/s MNC Municipality and sub-provincial city Netizen ODM Online customer Online shopping penetration rate Online shopping penetration rate of a website SEO SME Kilobits per second Megabit per second Multinational company Municipality refers to cities directly under the jurisdiction of the central government. Chinese municipalities include Beijing, Shanghai, Chongqing and Tianjin. Sub-provincial city refers to Harbin, Changchun, Shenyang, Dalian, Nanjing, Hangzhou, Ningbo, Xiamen, Jinan, Qingdao, Wuhan, Guangzhou, Shenzhen Chengdu and Xian (CNNIC, June 2008, p.7). According to CNNIC (June 2008, p.6), netizen is defined as the Chinese populations who have accessed to Internet in the past 6 months. Original design manufacturer According to CNNIC (June 2008, p.6), online customers are defined as the Chinese population who has purchased online in the past 6 months. Online shopping penetration rate refers to the percentage of online shopping customers relative to the total number of netizens for the past 6 months (CNNIC, June 2008, p.6). Online shopping penetration rate of a website refers to the percentage of the customers of a specific online shopping website relative to the total number of online shopping customers in the past 6 months (CNNIC, June 2008, p.6). Search engine optimization Small and medium-sized enterprise

8 Introduction 1 1. Introduction The Chinese economic miracle has been regarded as a key factor influencing the speed of world s recovery during current economic downturn. In this circumstance, a great number of companies shift their focus to the continuously growing Chinese economy. Online retailing in China is going through a period of exceptional boom. The market is immune to weak economic condition and has experienced an explosive growth. Customers appreciate online price advantages over offline stores and increase their online spending. In the current financial crisis, Chinese online shopping market provides an attainable opportunity for small and medium enterprises. According to Anderson (April 2009, pp.71-76), online platforms decrease the distribution costs including reduced spending on physical stores, rents and shelf spaces. Number of items sold online can be further extended. SMEs with unique niche products can reach target customers online more cost efficiently. With improved online searching capabilities and communication applications like blogs and product recommendations, consumers search costs for desired products is largely reduced through online channel. Online buyers can select best suited products at ease. Personalized demands can be satisfied more effectively. SMEs with direct online sales have more opportunities to compete with large conventional players by providing unique and individualized offers. Mixed with high technology, tremendous growth and distinct culture, Chinese online shopping market shows its promising appeals. Meanwhile, geographical diversity, cultural barrier and lack of understanding make this market less accessible from outside world. Within 10 years, the online market has experienced a dramatic change. One remarkable change in this industry was Taobao s victory, a Chinese local online shopping platform founded in 2003 championed ebay who previously held 85% of market share in 2003 (So/Westland, August 9, 2009). Amazon acquired a Chinese firm Jojo in 2004, still in fierce competition with local opponent Dangdang and has not achieved profitability. Witness a tremendous market potential, Baidu, the Chinese leading search engine who beats Google and controls 76.9% of the Chinese online search market, has moved into the online C2C shopping market in October 2008 and glares at the tempting B2C market (Baidu 2009). In this prosperous market of high competitive intensity and low entry barrier, only the

9 Introduction 2 companies who are able to understand and satisfy local customers can capture the opportunity. Renowned international companies with outstanding technology can easily collapse if consumers are approached in wrong ways. To understand the roaring potential of this market, especially in the perspective of foreign-based SMEs, major evaluations on Chinese online B2C shopping market are divided into four categories: online shopping market analysis, strategies of online retailers and manufacturers with direct online channels, potential obstacles in the industry and advice on the market entry for foreign SMEs. Major findings show that this rigorous market will continue its progressive growth. Foreign-based firms with a set of competitive advantages such as product uniqueness, premium service quality or branding knowhow have greater potentials to win over rivals. Disadvantages in the lack of market knowledge can be compensated by collaboration with well established local partners. Complementary services including logistics and online payments should be planned in a comprehensive way and tailored to customers purchasing habits. For example, online payment through local online third party payment tools and cash on delivery are preferred. Cultural difference has significant influences on marketing techniques, online communication and interaction, payment and delivery terms. For instance, Chinese online shoppers usually contact sellers for product information or price negotiation before their purchases through online instant messengers. It signifies that adequate number of customer service personnel should serve online during working hours and during peak buying time to respond to customers requests. To conclude, localization in all aspects is the key element for the success. Foreign SMEs should be prepared for an intense and rigorous competition in this environment, but also not to forget the continuous innovation and improvement. In this way, a small scaled company has chances to win over big MNCs in this kingdom of adventure.

10 Online Shopping Market in China 3 2. Online Shopping Market in China 2.1. Macroeconomic Environment in China China GDP went through an average increase by 9.6% per year from 1979 to 2008 (Men et al., August 2008). The economic crisis has slowed down the Chinese economic growth. Figure 1 below shows the declined GDP growth rate from double digits in to 9% in The demand of Chinese export has shrunk due to the global economic downturn and has badly hurt export-oriented manufacturers. Chinese government s current priority is to drive up domestic demands. Stimulus measures have been carried on to re-establish the economy (Chinese government's official web portal, September 11, 2009). Figure 1: China s GDP and Year-On-Year GDP Growth Rates 5.000, , , , , , ,0 10,0 10,1 10,4 11, , , , ,4 13, , , ,5 9,0 8,0 14,0 12,0 10,0 8,0 6,0 GDP (billion USD) 1.500, ,0 500,0 0,0 4,0 2,0 0,0 Year on year growth rate (%) e Source: Taiwan bureau of foreign trade, August 19, 2009 The Chinese government offered a fiscal stimulus package of RMB 4 trillion [USD billion] to stabilize the economic growth through 2010 (Xinhua, November 14, 2008). The investment is assumed to push up 1 % growth rate of GDP in IT industry receives around 0.5% to 1% of the cash injection, ranging from RMB 20 billion [USD 2.9 billion] to RMB 40 billion [USD 5.9 billion]. The governmental investment is expected to boost a higher growth in IT industry relative to other countries (IDC, January 20, 2009, p.1). Figure 2 in the next page shows the growth rate of China s IT market and GDP forecast in 2009.

11 Online Shopping Market in China 4 Figure 2: China s IT Market Growth Rate and GDP Growth Rate Forecast, 2009 % 12,0 10,0 8,0 6,0 4,0 2,0 0,0 Global Source: IDC, January 20, 2009, p.1 Asia Pacific US Japan India China GDP growth rate 1,8 3,7 0,0 0,7 6,8 8,0 IT market growth rate 2,6 4,0 0,9 1,0 10,0 9,1 The Chinese stimulus measure raised the GDP growth rate to 7.1% by June 2009 (Taiwan Bureau of foreign trade, August 19, 2009). The rescue package approved by the State Council includes a plan to revitalize top 10 industries for a faster economic recovery. Electronics and information industry is chosen as one prioritized industry for governmental assistance (Xinhua, April 25, 2009). Even though the growth rate is reduced, Chinese economy is still in a rapid development compared to other countries. World Bank estimates the Chinese GDP growth rate will reach 7.2 and 7.7 in 2009 and 2010 respectively (Xinhua, June 18, 2009) Internet Access Condition in China Netizen Scales and Internet Penetration Rates China has the world s largest online population. The size of web surfers reached 338 million by June 30, 2009 (CNNIC, July 2009, p.4). Figure 3 in the next page shows the increasing size of netizens and the Internet penetration rates in China from 2000 to 2009.

12 Online Shopping Market in China 5 Figure 3: Size of Netizens and Internet Penetration Rates in China (million) ,0% , ,5% 59,1 7,2% 8,5% 22,5 33,7 6,2% 4,6% 1,8% 2,6% 30,0% ,0% 25.5% 22,6% June ,0% 15,0% 10,0% 5,0% 0,0% Population of netizen (million) Internet penetration rate(%) Source: CNNIC, January 2003, pp.35-36,p.38; CNNIC, January 2004, p.38, p.40; CNNIC, January 2005, p.44; CNNIC, January 2009a, p.12; CNNIC, July 2009, p.11; National bureau of statistics of China 2002 The accelerated growth of netizens can be contributed to the elements below: Growing disposable income The rapid economic development raises the level of dispensable income. This has led to an increasing share of expenditures on information and communication products and services relative to the spending on daily necessities. This change in spending patterns has enhanced the adoption of Internet. Moreover, the economic crisis brings a large amount of unemployed workforce from industrial cities back to rural villages of origin. As those jobless return to rural regions, they disseminate knowledge of Internet and Internet usage behavior via their social network and personal contacts (CNNIC, July 2009, p.12). Increasing availability of affordable offers Increasing level of competitions between telecom carriers and activities of merging and acquisition among Internet service providers enhance the quality level of both software and hardware. The competition makes Internet connection more affordable. Mobile phones will become a more convenient device for Internet connection as 3G gains more prevalence. These factors lower the barrier to Internet use among populations (CNNIC, July 2009, pp.11-12).

13 Online Shopping Market in China 6 Governmental supports and investments The governmental policies have contributed to the rising Internet penetration rate. The Chinese government promotes Internet development mainly through the Eleventh Five-Year Plan and the National Informatization Development Strategy. These policies include investment in infrastructures for more prevalent Internet connections (CNNIC, July 2009, p.11). The project of rural informationalization was launched to establish phones and Internet access in every village by With the aims to urbanize countryside and bridge the gap between cities and villages, improving telecommunications infrastructures and providing online access to rural populations are regarded as priorities (CNNIC, January 2009a, pp.11-12) World Internet Penetration Rates The Internet penetration rate in China reached 25.5%, which has exceeded the world average rate of 24.7%. Figure 4 below illustrates the Internet penetration rate in major countries. Figure 4: World Internet Penetration Rates, 2009 World average India China Russia Brazil Japan US Korea 7.0% 24.7% 25.5% 27,1% 34,4% 74,0% 74,7% 77,3% 0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0% 80,0% 90,0% Source: CNNIC, July 2009, p.12, Internet World Stats 2009a, Internet World Stats 2009b Methods of Internet Access Broadband Broadband Internet access has been used by 94.3% of Chinese netizens, which is equivalent to 320 million, by June 2009 (CNNIC, July 2009, p.12). Though broadband Internet access gains a wide popularity in China, download speed remains less than 4 Mbit/s, lower than the average of OECD major countries, which is 17.4 Mbit/s, and far behind that in Japan and in Korea, where the download speeds reach 90 Mbit/s and 80 Mbit/s respectively

14 Online Shopping Market in China 7 (CNNIC, July 2009, p.13; Wang July 28, 2009). Because broadband width is shared, the data transfer rate further slows down during peak hours. The country still has a great deal of catching up to provide high-speed Internet service (CNNIC, July 2009, p.13). Figure 5 below shows the comparison of download speeds in major OECD countries. Figure 5: Download Speeds in Major OECD Countries Mexico Turkey Poland Hungary Ireland Canada Slovakia Greece Belgium Switzerland Spain US Luxemburg Austria Czech UK Italy Sweden Norway New Zealand Iceland Portugal Denmark Australia Germany Netherland Finland France Korea Japan Mbit/s Source: CNNIC, July 2009, p.14 Mobile Internet The number of netizens who are connected to the Internet via mobile phones reached 155 million (CNNIC, July 2009, pp.14-15). The usage rate of mobile Internet is related to the reduced monthly tariffs and the increasing applications developed for mobile Internet. The most used mobile Internet applications are entertainment-oriented, such as online music, television and blogs. Online music has 6.6 million active users. Meanwhile, the use of mobile commerce has not been widely penetrated but is also fast growing. In particular, the application of mobile WAP has 4.8 million of active users (CNNIC,

15 Online Shopping Market in China 8 January 2009b, p.5). The security of payment system and the number of mobile applications play important roles in the adoption of mobile commerce (IResearch, August 5, 2009). Users of mobile Internet and traditional Internet access overlap to a high degree. 94.5% of mobile Internet users use also PC for Internet access. Users use both channels for the same online applications. These two channels are complements for each other (CNNIC, January 2009b, p.6) Demographic Structure of Netizens Gender By June 2009 the gender distribution of male and female netizens is 53% versus 47% (CNNIC, July 2009, p.16). As Internet penetrates more widely, the gender structure of netizen has become more balanced (CNNIC, January 2009a, p.18). This means the male and female ratio among netizens will become more similar to Chinese citizens gender ratio, which is 51.5% and 48.5% in the year 2007 (National bureau of statistics of China 2008). The proportion of female netizens increased rapidly from 30.4% in 2000 to 47% in June Figure 6 below shows netizens gender distribution from 2000 to Figure 6: Netizens Gender Distribution 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 30,4% 40,0% 40,7% 39,6% 39,4% 41,3% 41,7% 42,8% 47,5% 47,0% 69,6% 60,0% 59,3% 60,4% 60,6% 58,7% 58,3% 57,2% 52,5% 53,0% Jun 09 Male Female Source: CNNIC, January 2007, p.45; CNNIC, January 2009a, p.18; CNNIC, July 2009, p Age Chinese netizens age structure is concentrated in the young age range,

16 Online Shopping Market in China 9 especially from 10 to 29. The number of netizens aged from 10 to 29 accounts for more than 60% of total netizens (CNNIC, July 2009, p.16). According to IResearch (2009b, p.17), the concentration among young population is because online entertaining applications such as online shopping and socialization tools are more appealing to young generations. Moreover, young adults are relatively more technologically competent which facilitates the adoption of Internet. Figure 7 below shows netizens age distribution in 2008 and June Figure 7: Netizens Age Distribution 40% 35% 30% 25% 20% 15% 10% 5% 0% 35,2% 33,0% 31,5% 29,8% 20,7% 17,6% 9,6% 9,9% 4,2% 4,0% 0,4% 0,9% 1,5% 1,7% Under and above 2008 June 2009 Source: CNNIC, July 2009, p.16 Chinese netizens are largely composed of young populations unlike other markets such as Macao, Hong Kong, Taiwan and Korea. Chinese netizens aged from account for 44.5% of total netizen, largely surpassing these four markets mentioned above. Figure 8 in the next page examines the age distribution of netizens in Mainland China, Korea, Taiwan, Hong Kong, and Macao.

17 Online Shopping Market in China 10 Figure 8: Netizens Age Distribution in China, Korea, Taiwan, Hong Kong, and Macao China 11,3% 44,5% 20,0% 14,8% 6,3% 3,0% Korea 15,9% 18,4% 22,0% 22,5% 14,9% 6,3% Taiwan 6,3% 22,6% 28,5% 21,5% 14,6% 6,6% Hong Kong10,8% 17,2% 23,1% 23,6% 17,6% 7,8% Macao 13,8% 28,6% 22,5% 19,8% 11,6% 3,7% and above 0% 20% 40% 60% 80% 100% Source: Wang, August 26, 2009 As Figure 9 shows below, the relatively high percentage of young web users group illustrates the concentration of netizen in the young segments. Nevertheless, this concentration appears to decrease. The age group of has gradually decreased its importance from 41.2% in 2000 to 31.8% in As Internet develops more prevalently, netizen s age structure will become more proportionally distributed as the structure of whole population (Wang, August 26, 2009). Figure 9 below shows the netizens age structure from 2000 to Figure 9: Development of Netizens Age Structure from ,1% 17,2% 16,6% 16,4% 18,8% 17,6% 15,3% 14,9% 49,9% 54,9% 54,4% 53,0% 51,3% 54,3% 52,5% 60,0% 19,4% 18,6% 18,7% 19,0% 19,7% 17,6% 20,3% 16,0% 11,7% 9,3% 10,3% 11,6% 10,2% 10,5% 11,9% 9,0% 0% 20% 40% 60% 80% 100% under and above Source: CNNIC, January 2002, p.7; CNNIC, January 2003, p.3, p.9; CNNIC, January 2004, p.11; CNNIC, January 2005, p.12; CNNIC, January 2006, p.14; CNNIC, January 2007, p.11; CNNIC, January 2008, p.17; CNNIC, January 2009a, p.18; CNNIC, July 2009, p.17

18 Online Shopping Market in China Income More than 70% of netizens have an income level of less than RMB 2000 [USD 292.9] per month. Figure 10 below shows the evolvement of netizens income level from 2000 to Figure 10: Development of Netizens Income Structure from 2000 to June 2009 June ,6% 15,6% 28,2% 14,2% 8,5% 4,9% ,5% 16,2% 29,8% 13,7% 8,0% 4,8% ,6% 16,7% 28,7% 12,4% 8,4% 5,2% ,5% 18,1% 24,8% 13,7% 8,9% 5,0% ,0% 15,7% 25,2% 12,8% 9,9% 6,4% ,2% 19,0% 27,4% 10,7% 5,8% 2,9% ,2% 15,6% 27,8% 11,9% 7,3% 3,2% ,0% 20,9% 23,6% 8,9% 4,4% 2,2% ,9% 25,3% 25,3% 7,8% 3,4% 2,3% ,7% 25,9% 23,3% 7,6% 4,7% 2,7% 0% 20% 40% 60% 80% 100% Under and above Source: CNNIC, January 2002, p.9; CNNIC, January 2003, p.5, pp.11-12; CNNIC, January 2004, pp.12-13; CNNIC, January 2005, p.14; CNNIC, January 2006, p.17; CNNIC, January 2007, p.13; CNNIC, January 2008, p.20; CNNIC, January 2009a, p.19; CNNIC, July 2009, p Educational Structure The educational level of netizen develops toward a lower degree of education (IResearch, 2009b, p.17). 74.9% of netizens have the educational level at senior high school or lower in June 2009, increasing from 29.9% in This development demonstrates that Internet is no longer limited to high education groups as it penetrates more widely. Figure 11 in the next page shows netizens educational structure from 2000 to 2009.

19 Online Shopping Market in China 12 Figure 11: Netizens Educational Structure Jun 09 33,9% 41,0% 12,7% 12,4% ,4% 39,4% 13,9% 13,2% ,8% 36,0% 18,7% 17,5% ,1% 16,2% 31,1% 30,2% 23,3% 24,4% 28,5% 29,2% junior high school and below senior high school ,0% 13,5% 29,3% 29,3% 27,1% 27,4% 30,7% 29,8% junior college ,9% 10,2% 30,6% 30,0% 26,1% 26,9% 30,4% 32,9% bachelor and above ,4% 23,5% 29,0% 41,1% 0% 20% 40% 60% 80% 100% Source: CNNIC, January 2002, p.8; CNNIC, January 2003, p.4, p.10; CNNIC, January 2004, p.12; CNNIC, January 2005, p.13; CNNIC, January 2006, p.15; CNNIC, January 2007, p.12; CNNIC, January 2009a, p.20; CNNIC, July 2009, p Trends in the Internet Development in China Internet connection is expected to be more prevalent in China due to continuous improvement in infrastructures, governmental promotion, and increasing mobile access. The continuous economic growth in the following years will lead to a constant increase in GDP per capital. Chinese population will enjoy more dispensable income, which generates more informative and recreational demands. Internet will penetrate more deeply in existing user groups in all aspects of life and become more widely accessible across the country Current Development of the Chinese Online Shopping Market Market Potential The number of online buyers reached 87.9 million by June 2009, increasing from 74 million in 2008 and 46 million in The online shopping penetration rate achieved 24.8% by June 2009, meaning 1 out of 4 netizens has purchased online in the past 6 months (CNNIC, July 2009, p.31; CNNIC, May 2009, p.31). The market value reached RMB billion [USD 18.8 billion] in 2008 with a robust growth rate of 128.5% compared to 2007 (IResearch,

20 Online Shopping Market in China a, p.14). Figure 12 in the next page shows the sales revenue and the growth rate of online shopping market from 2007 to Figure 12: Value of Transactions and the Market Growth Rates in the Chinese Online Shopping Market billion (RMB) ,1 113,2% 128,2 128,5% 238,8 86,3% 386,9 62,0% ,9% ,0% 120,0% 100,0% 80,0% 60,0% 37,3% 40,0% 20,0% sales revenue growth rate e 2010e 2011e 2012e 0,0% Source: IResearch, 2009a, p.14 Online sales accounted for 1.2% of retail sales in 2008 as Figure 13 shown below. Relative to the US where online sales accounted for 6% of retailing sales in 2008, Chinese online shopping market still has a large room to grow in the future (IResearch, 2009a, p.16). Figure 13: Percentage of the Online Retail Sales in the Total Retail Sales in the Chinese Market billion (RMB) 900,0 4,47% 800,0 3,64% 700,0 600,0 2,78% 500,0 1,96% 400,0 791,0 300,0 1,20% 576,0 200,0 0,63% 386,9 100,0 238,8 56,1 128,2 0, e 2010e 2011e 2012e Source: IResearch 2009a, p.17 5,00% 4,50% 4,00% 3,50% 3,00% 2,50% 2,00% 1,50% 1,00% 0,50% 0,00% Sales revenue Percentage of online retail in total retail sales

21 Online Shopping Market in China 14 Chinese online shopping market is largely composed of the sales in C2C marketplace, covering 93.2% of total online sales in Online B2C sales accounts for 6.8% of total online sales in 2008 and has been increased rapidly. Online B2C sales doubled in 2008 compared to As more enterprises start to enter into the online B2C market, the sales is expected to expand further (IResearch 2009a, p.19). Figure 14 below shows the composition of online shopping sales of B2C and C2C sectors. Figure 14: Value of Transactions in the Chinese Online B2C and C2C Market Billion RMB 900,0 800,0 700,0 600,0 500,0 400,0 300,0 200,0 100,0 0,0 292,0 176,4 86,9 31,8 499,0 8,7 399,6 119,5 207,0 300,0 4,3 51, e 2010e 2011e 2012e B2C C2C Source: IResearch 2009a, p.19 In 2008, the purchasing amount per person achieved RMB 1,600 [USD 234.3], with an increase of RMB 582 [USD 85.2] compared to the year 2007 (IResearch, February 12, 2009). Figure 15 below shows the constant growing spending of online customers from 2003 to Figure 15: Average Online Purchasing Amounts per User per Year RMB 1800,0 1600,0 1400,0 1200,0 1000,0 800,0 600,0 400,0 200,0 0,0 1602,3 1020,0 482,9 610,4 127,6 229, Source: IResearch, February 12, 2009

22 Online Shopping Market in China Best Selling Product Categories The most popular products sold online are fashionable goods, books, audio and video products. The combined sales of apparels, fashionable accessories, footwear and cosmetics reached RMB billion [USD 4 billion] in 2008, with a 136.8% growth compared to This product segment accounted for 21.4% of the total online sales in 2008 (IResearch, March 13, 2009). Table 1 below ranks the best sold items over Internet. Table 1: Ranking of Best Sold Items over Internet, 2008 Items Purchased by % of Online Buyers 1 Apparel, accessories and footwear 57.1% 2 Books, CDs and DVDs 46.0% 3 Cosmetics 40.6% 4 Electronics (Cameras, MP3) 35.4% 5 Rechargeable cards for games and cell phones 32.1% 6 Home decorations 29.2% 7 Cell phones and electronic accessories 27.4% 8 Gifts and toys 24.7% 9 Computer, laptops and hardware 23.0% 10 Home appliances 22.1% 11 Jewelries, watches, accessories, glasses 20.3% 12 Foods 19.7% 13 Maternity and baby products 11.5% 14 White goods (fridges, washing machines, air conditionings) 2.9% 15 Others 2.0% Source: IResearch, March 13, 2009 Fashion products top the online shopping can be explained by three reasons. First, online channels provide many cost advantages in offering wide collections in this fast moving industry. Compared to physical stores, online stores are not confined to limited shelf space. Changing customer requirements and short product life cycles can be addressed rapidly. Second, fashionable products are mainly high value-to-weight without major difficulties in delivery concerning product defect during transport and expiration dates. Third, the market demand for apparels is inherently strong. This industry occupies a substantial share in the offline retailing business, ranking at the second place after food products with RMB 2,400 billion sales revenue in 2006 (CNNIC, June 2008, p.30).

23 Online Shopping Market in China 16 According to IResearch (2009b, p.24), high standardized products, like books and CDs, have been one of the most sold products online. As online customers gain more experience with online transactions and its convenience, online purchases will not be limited to standardized products, but will contain a broader product range for personalized needs Online Buyer Analysis Gender The ratio of male and female buyers is 45.6% and 54.4% in 2008 (IResearch 2009a, p.84). Figure 16 below compares the gender composition among netizens and the online shopping customers in Figure 16: Netizens and Online Customers Gender Distribution, 2008 Netizens Online Buyers 52,50% 45,60% 47,50% 54,40% Male Female 0% 20% 40% 60% 80% 100% Source: IResearch 2009a, p Age Major online shopping buyers are aged from 18 to 30, accounting for more than 57.4% of total online customers (IResearch 2009a, p.84). According to IResearch (2009a, p.84) and CNNIC (January 2009a, p.18), 69.5% of online customers and 67.1% of netizens are aged less than 30 in Figure 17 below shows the age structure of online shopping customers. Figure 17: Online Customers Age Distribution, ,0% 33,3% 30,0% 25,0% 24,1% 20,0% 15,0% 12,1% 12,8% 10,0% 8,9% 8,9% 5,0% 0,0% Under and above Source: IResearch 2009a, p.84

24 Online Shopping Market in China Income The average income of online customers is higher than that of netizens. Compare netizens income level with that of online shoppers, 27.6% of netizens and 51.1% of online customers have the salary over RMB 2,000 [USD 292.9] respectively (CNNIC, July 2009, p.19, CNNIC, June 2008, pp.44-45). Table 2 below shows the income per month of online customers in June 2008 Table 2: Monthly Incomes of Online Customers, June 2008 Source: CNNIC, June 2008, p.51 Income level has a positive influence toward online purchasing amounts. The higher the income level, the more purchasing amounts. As Figure 18 indicates in the next page, 25.4% of online buyers whose monthly income exceeded RMB 5,000 [USD 732.3] spent more than RMB 5,000 online in the whole year In contrast, 59% of online buyers with income less than RMB 1,000 [USD 146.5] purchased less than RMB 1,000 online in This is because high income customers have far less time and higher opportunity costs for offline shopping. Online shopping provide time saving benefits for their purchasing needs (IResearch 2009b, p.31).

25 Online Shopping Market in China 18 Figure 18: Online Buyers Yearly Purchasing Amounts by Income, 2008 Monthly income (RMB) 5001 and above and below 22,6% 23,4% 28,6% 25,4% Purchasing amount 32,3% 26,9% 25,3% 15,5% 1000 and below 42,6% 25,2% 22,4% 9,8% ,3% 23,6% 15,1% 8,0% ,0% 24,6% 10,1% 6,3% 5001 and above 0% 20% 40% 60% 80% 100% Source: IResearch 2009b, p.31 Income level of online customers differs by regions. The online customers in Shanghai have higher income level than the customers in other sub-provincial cities. Table 3 below shows online customers income structure by cities. Table 3: Online Customers Income Structure by Cities, June 2008 Under Above 5000 Total Beijing 11.2% 28.2% 42.7% 17.9% 100% Shanghai 10.7% 25.5% 38.1% 25.8% 100% Guangzhou 13.5% 29.2% 37.5% 19.8% 100% Other sub-provincial cities 14.7% 42.4% 31.1% 11.8% 100% Source: CNNIC, June 2008, p Educational Structure Online buyers have average higher educational level compared to netizens. In June 2008, 84.9% of online customers have the educational level of junior college or above. Among netizens, only 36.2% have the educational degree of junior college and above in June 2008 (CNNIC, June 2008, p.48). Table 4 in the next page shows the educational level of online buyers.

26 Online Shopping Market in China 19 Table 4: Online Customers Educational Level, June 2008 Source: CNNIC, June 2008, p Length of Prior Internet Experience Netizens who have been using Internet for a longer period of time have more opportunities to experience online applications more frequently and have more tendencies to become online customers. According to IResearch (2009b, p.16), 2 to 3 years are generally required for Internet beginners to understand online shopping and become online customers. Afterwards, new online buyers will be converted into either active online customers with repeat purchases, less involved buyers or buyers who discontinue subsequent purchases. As Table 5 below shows, more than 80% of online shopping customers have used Internet for more than 5 years. This indicates that the number of online customers is expected to increase as more new Internet users become more familiar with Internet and other online applications (CNNIC, June 2008, p.47). Table 5: Length of Prior Internet Experience among Online Customers in Different Cities 2003 and Total before Beijing 84.5% 5.5% 3.5% 3.8% 2.0% 0.8% 100% Shanghai 84.0% 7.0% 4.0% 1.5% 2.0% 1.5% 100% Guangzhou 82.5% 5.8% 5.8% 2.5% 3.5% 0.0% 100% Other sub-provincial cities 81.6% 7.6% 4.4% 2.9% 3.2% 0.2% 100% Source: CNNIC, June 2008, p Region Online customers are concentrated in top tier cities 1 including municipalities and sub-provincial cities. In 2008, the online customers in Beijing, Shanghai 1 Due to the lack of a unified definition on tiers of cities, the administrative divisions defined by Ministry of Civil Affairs of the PRC will be applied here. First tier cities refer to municipalities and sub-provincial cities. Second tier cities refer to prefecture-level cities.

27 Online Shopping Market in China 20 and Guangzhou accounted for 28.8% of total online buyers. The customers in these three cities alone covered 33.1% of total online shopping sales. According to IResearch, the penetration rate of online shopping in Shanghai and Beijing reached 67.2% and 65.3% respectively (IResearch 2009a, p.26). Table 6 below exhibits the detailed penetration rates in each region. Table 6: Online Customers Scale and Penetration Rates by Region, 2008 Region Number of Online Customers (million) Number of Netizens (million) Online Shopping Penetration Rate* Whole China % Shanghai % Beijing % Guangdong % Zhejiang % Jiangsu % Shandong % Hubei % Sichuan % Fujian % Hunan % *Online shopping penetration rate in this section is defined as online customers who have purchased online within the whole year 2008 Source: IResearch 2009a, pp.26-27; CNNIC, July 2009, p.11, p.32 In this section, a different methodology is used to define the penetration rate of online shopping. The online shopping penetration here is calculated by the number of customers who have purchased online within the whole year 2008 divided by the number of netizens within the region. This is different from the definition of CNNIC where the online shopping penetration rate refers to the proportion of customers who have online purchase experience within 6 months rather than within a whole year. Compared with the country-wide penetration rate of online shopping 26.8%, the penetration rate in Zhejiang, Jiangsu, relatively wealthy provinces of Yangtze River delta, achieved more than 30%. The penetration rates in Hubei and Sichuan also surpassed the country s average. In terms of online sales

28 Online Shopping Market in China 21 value, Zhejiang, Jiangsu, Shandong, Fujian, Sichuan, Liaoning and Hubei have increased their importance within the country and demonstrate their growth potentials (IResearch 2009a, pp.26-27). Figure 19 below shows the online sales by region in Figure 19: Value of Online Shopping Transactions by Region, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 39,1% Source: IResearch 2009a, p.27 25,8% 20,1% 16,4% 9,0% 7,5% 10,0% 7,8% 11,0% 8,7% 9,7% 11,1% 10,8% 13,0% Jan June others Shandong, Fujian, Sichuan, Hubei, Liaoning Beijing Jiangsu Zhejiang Guangdong Shanghai Payment Methods The number of online payment users reached 75.7 million. Among all netizens, the online payment penetration rate reached 22.4%. 86.2% of online buyers have used online payment by June 2009 (CNNIC, July 2009, p.32). Other than online payments, fund transfer can be done via cash on delivery, bank or post transfer. Despite the fact that online payment is prevalent; cash on delivery is still one of the preferred payment methods offered by major online retailers. Table 7 below shows the most used payment tools for online transactions in Table 7: Most Used Payments Methods by Online Customers, 2008 % of Most Used Payment Methods Online third-party payment platform 50.4% Online banking 21.4% Cash on delivery 16.8% Bank transfer 3.8% Post transfer 3.1% Card on delivery 2.3% Cash and carry 0.9% Mobile payment 0.7% Telephonic payment 0.4% Source: IResearch 2009a, p.100

29 Online Shopping Market in China 22 In terms of online payments, major service providers are Alipay, Tenpay, and UnionPay. These three operators occupying 78.1% of online payment market share (IResearch, July 28, 2009). The rest of market is divided by more than 50 smaller service providers (Shi, June 2009, p.155). Providing services similar to PayPal, Alipay and Tenpay belong to Alibaba and Tencent group respectively. UnionPay is the government-owned online payment system which connects major Chinese banks. Figure 20 below shows the market share of major online payment providers. Figure 20: Market Share of Online Payment Providers in China, ,0% 21,9% 22,7% 47,4% Alipay Tenpay UnionPay Others Source: IResearch, July 28, Determinants of Online Purchase Decisions Major factors affecting online purchasing decisions include reputation of sellers, after sales services, other buyers feedbacks, delivery timing and quality, price, brand recognition, web surfing speed, promotions, advertisements and user interface of websites (IResearch 2009b, p.28). From customers perspectives, sellers reputation, other users feedbacks and after sales services are three underlying factors which determine the level of reliability and security of online purchases. These are areas where online sellers could enhance performance by reducing buyers perceived risk and gaining trustworthyness from customers (IResearch 2009b, p.23). As Figure 21 and 22 shown in the next page, male and female online customers express similarities and differences for online shopping decision making. Reputation of sellers is one of the most influential factors for both male and female customers in their online purchase considerations. Other users feedbacks are regarded as slightly more important for female customers than for males. Male buyers consider more on price and after sales service. According to IResearch (2009b, p.28), the difference are resulted from

30 Online Shopping Market in China 23 psychological reasons and product characteristics. Male customers are more likely to act rationally and seek more measurable hard product information. Products purchased by females tend to be relatively less standardized. In this case, soliciting advice from other users may facilitate decision making (IResearch 2009b, p.28). Figure 21: Key Influencing Factors on Online Purchasing Decisions of Male Customers, 2008 After sales service Reputation of seller User' review Price Brand Delivery Surfing speed Information in online community User interface of website Advertisement and promotion 4,2 4,2 4,1 4,1 3,9 3,9 3,7 3,4 3,3 3,3 Source: IResearch 2009b, p ,5 1 1,5 2 2,5 3 3,5 4 4,5 Figure 22: Key Influencing Factors on Online Purchasing Decisions of Female Customers, 2008 User' review After sales service Reputation of seller Price Delivery Brand Surfing speed Advertisement and promotion Information in online community User interface of website 4,3 4,3 4,3 4,2 4,0 3,9 3,7 3,5 3,4 3,3 Source: IResearch 2009b, p.28 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5, Information Channels Among Netizens Among netizens, Internet, friends and families are major sources of information for online shopping websites. These channels have outpaced the

31 Online Shopping Market in China 24 traditional offline advertisements (CNNIC, June 2008, p.29). Figure 23 below shows netizens information channel to acquire information of online shopping websites. Figure 23: Netizens Media Channels for Information of Online Shopping Websites, June 2008 Internet Friend and relative TV Advertisement in magasine Outdoor advertisement Newspaper Activity organised by enterprise Radio 9,2% 8,0% 5,3% 5,2% 0,5% 0,4% 52,6% 70,5% 0,0% 20,0% 40,0% 60,0% 80,0% % of netizen Source: CNNIC, June 2008, p.29 Among online advertising tools, important components are search engines advertisements and links exchange with other websites targeting similar group of audiences (CNNIC, June 2008, p.31). Blogs has gained rising importance as well. 53.8% of the netizens own a blog or a web space. 35.3% of total netizens update their blogs within 6 months (CNNIC, July 2009, p.30) Future Development of Online Shopping Customers Changing customer behaviors can cause significant impact on any company s operations and strategies, notably in the dynamic online shopping industry. Some potential changes in Chinese online customers are identified as below: Wider and deeper penetration of online shopping Online shopping will penetrate more widely and deeply in the daily lives. As netizens use Internet for a longer time, shoppers will gain more familiarity toward online technology. More interactions will be generated between customers and online applications (CNNIC, June 2008, p.47). While web browsers become more accustomed to online applications, they will have more opportunities to acquire online shopping information and to be engaged in online purchases. Though metropolitan cities account for the main part of online shopping sales, the sales contribution from second tier cities has shown a steady increase. The

32 Online Shopping Market in China 25 penetration rates in Beijing and Shanghai will become more saturated in the future as 65.3% and 67.2% of netizen already had online purchase experience in In the future, second tier cities will provide opportunities for the continuous growth in this market (IResearch 2009a, pp.26-27). More focus on convenience and personalized needs Price has been one major concern for Chinese online shopping customers. Customers purchase online mainly for better prices in the beginning. As online customers gain more knowledge about online shopping, price will not necessarily be the dominant deciding factor anymore. Convenience will become one of the core values, especially for those time-starved white collars and middle class who appreciate efficiency and flexibility in their tight schedules. Customers will develop more confidence in online shopping and purchase wider product categories online due to the improvements of product varieties and complementary services. Online sellers will learn to understand customers needs and provide more specialized products and services. Moreover, logistic providers have enhanced their service coverage. Online retailers have also become more skilled in marketing techniques. The enhancing service level will lead to more customer satisfaction and positive growths in the industry. To sum up, online customers are expected to be more aware of the value and advantages of online shopping in the coming years. More personalized needs and offers will emerge. As online shopping gets more involved in customers lifestyle, more unique personal styles will arise. Furthermore, as regulations of online shopping market have become more comprehensive, perceived risk of online shopping can be further reduced. This indicates positive outlook to the market growth in the future. 2 The online shopping penetration rate mentioned here is defined as the percentage of netizens who purchased online among number of netizens within the whole year 2008

33 Market Participants in the Online Retailing Market and their Business Model Market Participants in the Online Retailing Market and their Business Models 3.1. Overview of the Online Retailing Market In the Chinese online B2C market, Taobao platform is the market leader with 20.2% of market share, followed by 360Buy, Amazon and Dangdang with 16.1%, 12.1% and 11.3% of the market share respectively in Details of the online retailing market share and the sales revenues of major retailers can be found in Figure 24 and Figure 25 below. Figure 24: Market Share of Online Retailers in China, 2008 Menglu 1,8% 99read 1,8% Redbaby 3,5% 139shop 4,2% Vancl 4,3% PPG 1,3% M18 7,9% Others 15,6% Taobao B2C platform 20,2% Amazon Dangdang12,1% 11,3% 360Buy 16,1% Source: IResearch 2009a, p.35 Figure 25: Value of Transactions of Major Online Retailers, 2008 Taobao 360Buy Amazon Dangdang M18 139shop Vancl Redbaby 0,37 0,37 0,3 0,69 1,05 0,98 1,41 1,76 0 0,5 1 1,5 2 billion (RMB) Source: IResearch 2009a, p.37 The general characteristics of the Chinese online shopping market are

34 Market Participants in the Online Retailing Market and their Business Model 27 discussed below. High competition intensity in the online retailing market The online shopping industry is going through a period of fast growth and turbulence with fierce competition. Major players compete to gain a controlling share of the market in all aspects (Analysys International, June 15, 2009). Common promotional activities including price discounts and shipping cost reductions are widely used to gain customers. As one online shopping mall takes initiatives on sales promotion, competing firms follow very shortly (Economic Observer, August 16, 2009). Automatic price comparison system is adopted by top players to offer best prices among competitors and modify automatically online price to a comparable level if rivalry companies reduce their prices. Due to the intense price competition, online buyers are swayed by lower prices with relatively low brand loyalty (Economic Observer, August 16, 2009) One difference between offline and online shopping is that physical supermarket in the neighborhood without price advantages or product differentiation can still survive by its convenience. However, online retailers are easily neglected if product distinction or further values are not provided. Moreover, purchasing online involves less opportunity costs relative to offline shopping because price comparison between several online malls can be realized within a second (Liu, May 15, 2009). This aggravates the price competition and lead to squeezed profits in the market. Online retailers compete with all means for winner-takes-all markets in the long run (Economic Observer, August 16, 2009). Most large scaled online B2C retailers still struggle to become profitable due to lack of scale economies; therefore, inability to achieved reduced costs per unit (Analysys International, June 15, 2009). Meanwhile, new comers backed by venture capitalists enter this market to a great extend. A number of young established specialist retailers emerge by offering specific product categories, like online specialists in food, clothes, and shoes (IResearch, April 28, 2009). Wholly-owned logistic service To increase customers online shopping experience, major large online retailers, like 360Buy and Amazon invest in their own logistics systems. Different from other online business operations in developed markets, online retailers in China are not purely electronic companies dealing with information flow but bear more responsibilities in complementary services. In Chinese